US Treasury Yields Rise Amid Escalating Gulf Region Tensions

Middle East Tensions Drive Oil Prices Higher, Fueling Inflation Concerns

U.S. Treasury yields rose on Wednesday as rising hostilities in the Middle East following strikes by both the U.S. and Iran sent oil prices higher and reignited worries about sustained inflation pressures. The yield on the benchmark U.S. 10-year Treasury note rose 3.4 basis points, its biggest daily gain in two weeks, hitting 4.489% after climbing to 4.499% on the session.

The Middle East tensions have led to a significant increase in oil prices, with U.S. crude rising 2.4% to $96 a barrel and Brent rising to $97.77 per barrel, up 1.8% on the day. The Strait of Hormuz, a crucial transit point for one-fifth of the world's oil and gas supply, has been at the center of the conflict. Iranian attacks on Kuwait damaged its airport and injured dozens, while the U.S. military carried out strikes near Hormuz.

US Economic Data Beats Forecasts

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Despite the concerns over inflation, the US economic data released on Wednesday beat forecasts. Private payrolls increased by 122,000 last month, according to the ADP national employment report, topping the 117,000 estimate of economists polled by Reuters. The report is a precursor to Friday's government payrolls report.

The Institute for Supply Management's nonmanufacturing purchasing managers index increased to 54.5 last month, besting the 53.8 estimate, from 53.6 in April. The Commerce Department said factory orders surged 4.8% in April, the largest increase since May 2025 and above the 4.6% forecast, after an upwardly revised 1.8% advance in March.

Fed's Williams Sees No Need to Change Rates

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Federal Reserve Bank of New York President John Williams reiterated that he does not believe the U.S. central bank needs to change the setting of short-term interest rates despite upside inflation risks tied to the Middle East war and other forces. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 2.9 basis points to 4.068%.

The market expectations have shifted and are now pricing in about 20 basis points in hikes, according to LSEG data. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.537% after closing at 2.534% on Tuesday. The 10-year TIPS breakeven rate was last at 2.394%, indicating the market sees inflation averaging about 2.4% a year for the next decade.